UUP: An Exact Replacement for USD/EUR

UUP tracks the value of the U.S. dollar versus a basket of six currencies: the yen, euro, British pound, Swedish krona, Swiss franc, and Canadian dollar.UDN is short the basket of those currencies. One would expect that UUP would move inversely to some degree as each of the six other currencies changed.

However, because UUP and UDN are valued against six independent currencies, those movements would be a cumulative result of the rise and fall of the total basket. Logically, it would be unlikely that UUP or UDN would exactly follow one of the basket currencies.

Remarkably UDN has an almost perfect correlation to FXE over the last two years. It's almost as though you could substitute one fund for the other, they so closely track each other.

In contrast, FXY has a far weaker correlation to UDN.

The remaining four currencies are in between in their degree of correlation to UUP and UDN.

It's almost as though the krona, franc, pound, yen and Loonie completely cancel each other's effect leaving the UUP to trade like a perfect USD/EUR pair match. Over the llifespan of the fund (two years), owning UUP has acted as an exact replacement for USD/EUR. UUP, despite valuing the dollar against six currencies, has behaved like the USD/EUR pair.

Comments

[Rickey:]

Why did you omit the fact that the Euro is 57% of the fund? The second in the fund is the Yen at 13%. Of course the fund is going to track very close with the Euro.

Jul 12 10:49 AM

[Stephen Ros...:]

Rickey,
You are correct. Most investors look at UUP as a trade against 6 other currencies. In fact, UUP behaves like USD/EUR. UDN is a near perfect match for FXE.

Jul 12 06:49 PM